How to Talk to Your Employees About Compensation

Will Yakowicz is a staff writer for Inc. magazine. He has reported from the West Bank and Moscow for Tablet Magazine; covered business, crime, and local politics for The Brooklyn Paper; and was the editor of Park Slope Patch. He lives in Brooklyn, New York.

Talking with employees about their compensation can be difficult--the sentiment that you are summing up their entire value with a dollar figure can be hard to avoid. But you're hardly alone in your struggles.

A recent survey by compensation research firm PayScale finds that 73 percent of company leaders do not feel "very confident" in their managers' ability to effectively communicate with employees about salary issues, the Harvard Business Review reports.

As awkward as they may be, "these are the most important conversations you have throughout the year," V. G. Narayanan, professor of business administration at Harvard Business School, tells HBR editor Amy Gallo. Below, read several steps you need to go through to prepare for those conversations and carry them out to your employees' satisfaction.

Discuss early and often.

Your company's compensation, raise, and bonus structure should be fully explained at the beginning of each year and repeated throughout. Your employees should never be surprised or left in the dark about company procedure. Narayanan says that you need to explain when people should expect raises, how people can achieve a bonus by meeting their goals, and what happens if they don't meet those goals. "The more frequently you have the conversation, the easier it is," he says. If you conduct regular check-ins, employees will not be surprised by anything and less likely to have a bad reaction when you explain your decision at the end of the year.

Make performance reviews separate.

Performance is linked to compensation, but these two topics should be talked about and reviewed separately, Narayanan says. "If you talk about money in the shadow of performance, it will sound like white noise and your employees will just fixate on the compensation," he says. You should first have a performance review focused on the employee's growth in the company and then a few weeks later talk about whether or not they will be receiving a raise or bonus.

Remove the appearance of bias.

No matter who you are, you're going to have favorite employees and less-than-favorite employees. But during sticky conversations about salary, you need to protect yourself from bias, or claims of bias. Narayanan suggests having two or three other executives with you in all meetings with employees about compensation. "When more people make the call, employees know there are checks and balances, and that the process is fair and consistent," he says.

Prepare your words.

Whether you're a master at discussing compensation or it's your first time, make sure you know what you are going to say and how you're going to say it. Karen Dillon, author of HBR Guide to Office Politics and coauthor of How Will You Measure Your Life? says to use empathy during these conversation and avoid being robotic. "Ask yourself: How is this person going to hear my message? It's unlikely that you'll be giving them a raise they'll be absolutely joyous over. But what you say should persuade them that what you are giving them is fair," she tells HBR.

Communicate the employee's value.

While a bonus can help employees feel validated, you also have to take this opportunity to tell them how much they mean to your company. "You're in a partnership with your employee and you have to let them know that you deeply value their contributions," Dillon says. Your words also should motivate them to continue working hard.

Ground the conversation with facts.

Your discussion needs to have a solid factual and contextual basis. If the employee is not thrilled with the bonus, or you're not giving him a bonus at all, you need to lay out the reasons why. "Ground it in facts. Explain what people are getting for this job with this title in this market with these skills," says Tim Low, vice president of B2B marketing at PayScale. "It's incumbent on you to understand what it means to be paid fairly." Don't talk about other employees, but explain how you came to your decision. The employee should walk away understanding the reasons and not feel that your decision is arbitrary.

Expect emotion.

Money makes people emotional, so you need to prepare for a strong reaction. If employees get upset, acknowledge their feelings, listen to their reasoning, but don't give in. However, if you agree with their arguments, tell them you're going to stand up for them. No matter what, don't give a bonus or raise to someone who acts out--rewarding bad behavior will cause problems for your compensation discussions with other employees.